What is a Break-Even Point?

The day you first turn a profit is perhaps the biggest milestone in any business' life. Many work tirelessly for months, even years, to get there. And the journey can be tough.

But before this milestone, there’s a lesser celebrated point—a clear sign that your startup is starting to work out. It’s the break-even point.

It’s where a business' total revenues equal its total costs (resulting in neither profit nor loss), hence the name break-even point. It’s calculated by dividing fixed costs by the contribution margin per unit.

Understanding the break-even point helps young businesses make big strategic decisions, so understanding how to calculate your break-even point is an essential skill for any business owner.

Together, we’re going to explore how to get the break-even point, as well as some other tips and tricks.

The importance of calculating your break-even point

You might be wondering if the break-even point is just a symbolic milestone? The answer is no.

While reaching a break-even point does herald a major turning point on your road to success, that’s not its only purpose. Understanding the break-even point brings many serious advantages, for example:

• Pricing: Pricing is one of the hardest things for young Filipino businesses to get right, not least with rising costs of raw materials and fluctuating consumer demand. A break-even price formula can help. This way, Filipino SMEs can set prices that cover both fixed and variable costs while ensuring a reasonable profit margin.
• Budgeting: Understanding break-even formulas gives you better insight into expenses (especially in high-cost urban centres like Metro Manila or Cebu). It reveals hidden information on how changes in costs, like rent and labor, impact overall financial health, helping you forecast and allocate resources more effectively.
• Profit Planning: On a basic level, it’s useful for startups to know exactly how many units need to be sold or how much revenue must be generated to start making a profit. It helps businesses set clear targets that will contribute to profitability.

Essentially, it's about expanding your decision-making ability. If you know how to compute the break-even point, you’re on your way to understanding your financial health and taking steps to improve it.

Break-even point formula: Understanding the basics

Let’s start at the top. Here’s the formula you can use to find your break-even point:

Break-Even Point (in units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

This is a fundamental formula. Businesses all over the Philippines use it to figure out how many units they must sell to cover all their costs every day. 

Did you notice that “variable cost per unit” part? The difference between the selling price and variable cost per unit is called the contribution margin, which contributes to covering fixed costs and eventually generating profit.

Let’s take a small sari-sari store. They can use the break-even units formula to determine how many sachets of coffee or snacks need to be sold daily to cover their overheads, like rent and electricity.

For a manufacturing business, for example, it’s a bit more complicated. They might use break-even analysis to help price new products and plan production volumes, especially when dealing with fluctuating material costs or electricity rates. 

In service-based industries (imagine a salon or a tutoring centre), break-even formulas help understand how many clients are needed per day or month to remain financially viable.

So you can see that knowing how to calculate break-even points is one of the main tools in any business’ tool kit, and one you should master as soon as possible!

Break-even units formula

On the most fundamental level, the break-even units formula tells you the number of products, or units, you must sell to cover your costs (without making a profit). Here’s the formula:

Break-Even Units = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

Fixed costs are expenses that are fixed, meaning they don’t change (like rent, salaries, or utilities). Variable costs change (think things like raw materials and packaging). You’ll have to minus the variable cost per unit (the contribution margin) from the selling price.

Understanding how many units you need to sell is crucial. After all, without this formula, how are you going to set the right targets? 

For example, if a bakery has ₱50,000 in monthly fixed costs, sells cakes at ₱500 each, and the variable cost per cake is ₱300, the break-even point would be:

₱50,000 / (₱500 - ₱300) = 250 cakes

In other words, they must sell at least 250 cakes to break even.

Break-even price formula

Here, we're going to look at break-even points from a pricing angle. Meaning, if you want to determine the absolute minimum you can sell your products for (not the number of units), use this formula: 

Break-Even Price = (Fixed Costs + Variable Costs) / Number of Units

Essentially, you add both your fixed costs and variable costs, then divide that by the number of units you expect to sell. The result is the price per unit needed to break even, but remember that price won't necessarily make a profit.

As always, let’s clear things up with an example:

A small T-shirt printing business in the Philippines has fixed monthly costs of ₱20,000 and variable costs of ₱150 per shirt. Let's imagine they plan to sell 200 shirts per month. The break-even price is:

(₱20,000 + [₱150 × 200]) / 200 = (₱20,000 + ₱30,000) / 200 = ₱250 per shirt

So, in order to break even, they need to price each shirt at ₱250. By pricing higher, they’ll make a profit. Lower, and they won’t break even.

How to calculate your break-even point: A step-by-step guide

Now you know the two main break-even formulas, you might have some idea how to go about using them. Just to make things even easier, here’s how to calculate the break-even point in detail:

1. Identify fixed costs: 

First things first, find out your fixed costs. These are expenses that don’t change, regardless of your production volume. This should be fairly straightforward (as you pay them every month). In the Philippines, these are usually:

• Rent for a store or office
• Staff salaries (non-commission-based)
• Internet and utilities (base charges)
• Business permits and licenses

2. Determine variable costs per unit:

Next, it’s time for variable costs. These are costs that change depending on the number of units sold. For example:

• Raw ingredients or materials
• Packaging
• Delivery or logistics fees
• Commission-based wages

3. Set the selling price per unit:

Use the break-even price formula to calculate the price customers pay for one unit of your product or service.

4. Apply the break-even point formula:

Once you’ve gathered all your costs together, it’s time to use the break-even point formula. Remember, that’s:

• Break-Even Units = Fixed Costs / (Selling Price - Variable Cost)

Let’s look at an example. We’ll follow a small Manila food stall as they calculate their break-even point:

1. They pay ₱15,000 monthly rent, ₱5,000 in salaries, and ₱2,000 in utilities. Their fixed costs are ₱22,000.
2. Each meal costs ₱60 to make and ₱10 for packaging. Total variable costs per unit equal ₱70.
3. Their price per meal is ₱120.
4.  ₱22,000 / (₱120 - ₱70) = 440
5. To break even, the food stall must sell 440 meals per month.

Break-even point and sales: How to compute break-even sales

You'll probably want to know how much revenue you need to make to cover your costs, not just how many units or their prices. We’re still working with variations of the same formula, but we need to switch things up a bit.

Here’s your formula:

Break-Even Sales = Fixed Costs / Contribution Margin Ratio

Where the contribution margin ratio is calculated as:

(Selling Price - Variable Cost) / Selling Price

Don’t worry, this isn’t as complicated as it sounds. As long as you have the starting figures in front of you, you can’t go wrong.

Here’s an example:

A small café in Cebu has monthly fixed costs of ₱60,000. Each drink sells for ₱150, with a variable cost of ₱60. The contribution margin is ₱90, and the contribution margin ratio is:

• ₱90 / ₱150 = 0.6 or 60%
• Break-Even Sales = ₱60,000 / 0.6 = ₱100,000

This means the café needs to generate ₱100,000 in sales per month to break even.

Knowing how to calculate break-even sales helps businesses set revenue targets. Of course, remember that this tells you how much you need to make to break even, not to make a profit.

Common mistakes to avoid in break-even analysis

People can sometimes go wrong trying to calculate their break-even point. But mistakes in calculations can lead to serious miscalculations in targets, so it's best to be forewarned.

With that in mind, here are some common mistakes and how to avoid them:

• Incorrectly classifying costs: Mixing up fixed and variable costs is easily done. We recommend separating fixed costs and variable costs into separate columns and going through each one carefully to double-check that it’s in the right place.
• Using inconsistent data: Many costs change regularly, so businesses sometimes accidentally use outdated or inconsistent pricing and cost figures. You should try to use the most accurate data possible—accounting software can help you stay on top of this more easily.
• Ignoring changes in scale: Many simply assume that costs remain the same as production increases. Remember that variable costs per unit may decrease or increase with volume.
• Overestimating sales volume: You want accuracy, not dream figures. Many businesses fall into the trap of being overly optimistic about how many units can be sold.
• Not updating the break-even analysis: Some also make the mistake of thinking break-even is a one-off calculation. You should recalculate your break-even point regularly.

Using break-even analysis for business strategy

Break-even point formulas are one of the best free tools for Filipino startups. If you’re one of them, you should be using break-even analysis to guide key decisions in pricing, cost management, growth planning, and more.

• Pricing Strategies: The goldilocks zone of pricing sits somewhere between competitiveness and profitability. Break-even analysis helps find this zone and determine the minimum price needed to cover costs. 
• Cost-Cutting: As well as figuring out how much to charge, businesses can also use break-even analysis to figure out where to cut costs. By understanding cost structures, businesses can identify areas for savings, like reducing packaging expenses or negotiating better supplier deals, without compromising quality.
• Growth Planning: Break-even is a great way to set clear targets early on. Businesses can use it to assess the feasibility of expansion and estimate how many units must be sold in a given period.

Conclusion: Mastering break-even analysis for business success

It’s clear that break-even point calculations are about a whole lot more than setting prices. Businesses can use the break-even units formula, the break-even price formula, the break-even sales formula, or even a combination of all three to build stronger business strategies.

These calculations can inform everything from pricing strategies and cost-cutting to profit and growth planning. So knowing how to calculate the break-even point is an essential part of running a business in the Philippines.

And don’t forget, user-friendly accounting software, like QuickBooks, can calculate and gather all the numbers you need in moments—try it 100% free for 30 days!